Update 72: Stock Market – The Sky’s the Limit???
OPTION PROFESSOR WEEKLY MARKET UPDATE
Observations & Opinions
December 14, 2019
Last Week/This Week
Last week we saw the S&P 500 put another 40 handles or so on its price as we continue to feed off 3 basic areas in our view.
These areas include the Trade Deal,Boris Johnson’s landslide and the seasonality which tends to be strong at this time. an additional factor is the corporate buy backs that may be necessary to be completed by year end and sellers feeling this buy volume must come in so why sell at current prices…better to wait and let these guys buy into a no seller environment. Obviously at some point the reality of revenues and earnings versus price must rear its ugly head but there is no evidence of that just yet
This Week….Central banks in Europe & Japan have some announcing to do and we will get more economic data (retail sales missed expectations) and maybe we’ll get more clarity on what kind of a deal has been struck…..if you are long..enjoy the ride and if you want to play it from the sell side it’s important to be patient to wait for the market to stop making daily & weekly new highs.
The big questions ahead of us for 2020 as we continue to see the market drifting higher and higher into uncharted territory is at what point will valuations matter, after a revenue & earnings dud in 2019 will companies make the kind of money to justify the advance, will the trade deal Phase 1 be the only phase before the election, the Fed has driven money market rates down 40% & forcing people swim in riskier waters to get their yield or are they done, will inflation get the boost we hear about but positioning is not prepared for, will Brexit get done in a year as Boris said or more like the China deal a drawn out saga. Finally; the consumer is the engine behind the economy and will they spend take on credit debt (without defaulting) to such a level as to deliver the revenues companies need to deliver the earnings ultimately necessary to sustain the advance….many calling for 3400-3600 S&P.
Currently…our opinion on short term support levels are basis S&P are 3160/3120/3070 whereas a Fib count to about 3200 upside.
Learning about the uses & risks of hedging tactics such as covered call, collars, married puts, replacement calls could be useful.
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With the strength in the equity markets we see yields rise a bit after the trade deal & Brexit optimism but not too crazy and failed to take out 2% on the 10 yr Treasuries. Central banks have cut rates worldwide in 2019 at a record pace and I hear the words like “helicopter money” being used throughout the world……the triple BBB space is so crowded that now triple CCC and leveraged bank loans are now being pursued in the chase for yield. Spreads between junk bonds and treasuries are very tight so the increasing foray into risky waters via ETF’s and poorly collateralized (if any) debt is in our view growing at dangerous levels and if there were ever a redemption run (is it if or when?)..the lack of liquidity will be exposed and could be the catalyst for huge volatility. Our opinion has been the duration play has been made (TLT had a 30+% run this year) and now we monitor TLT prices of above 145 indicates lower rates (some say substantial) and below 135-130 could scare the bulls into selling into a vacuum.
Most call on 10 yr Treasuries yields for 2020 range 1.5%-2%….caveat emptor…..a lot of these guys thought rates would rise in 2019.
Well as we said the British Pound was the place to be as Boris wins big (simple slogan-play on frustrations-sounds familiar??) so the rally from 120 level in Sept to about 135 now really of no surprise as prices rise when optimism replaces despair. If the carrot and the stick approach that we’ve adopted with the cloak & dagger China deal is effectively employed by Boris on Brexit the potential for no one wanting to be short (like our stock market) may lift the Pound Sterling further in 2020. Will the Dollar resolve its year long trading range with a breakout in 2020?? Good question…..if we break 95 look out below…break 88-90….then yell Timber!
Slowly but surely prices have been matriculating to the upside….the Aramco deal went off well last week touching 2 Trillion valuation as that companies makes more money than all our oil companies combined and supposedly plans on distributing 75 Billion in dividends….oil & gas companies have also been creeping higher and is a sector to monitor if prices break above 65.
In 2020 will we see inflation pick up as the Fed desire and the Dollar drop as the administration desires? If so; then the belief here is that the bull market in metals will reignite and the support levels mentioned here of 1450 (already hit) 1400 and 1350 (breakout point) will in hindsight be viewed as excellent reentry points after the selloff consolidation common after an parabolic move to 1580 earlier this year. Silver holding up a bit better than Gold but the bigger winner has been Copper as China needs are global
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Back on the bicycle for beans & products as the deal seems to include substantial longer term purchases from China and farmers having not invested their money in equipment (CAT & DE) may be caught with supplies tighter if weather & other factors were to hurt the supply side. Resistance zone s remain at 9 (we already surpassed) 950 and 10…let’s see how we do at those levels but 8 earlier this year still seem like the turning point. Bean oil has had a pretty good year and the moving averages and long term charts tell us that if this environment continues the upside potential may be considerable.
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